Salesforce.com Stock Is in a Tough Spot

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Salesforce.com Inc. (NYSE:CRM) is becoming a well-known and respected company on the Street. The stock has made huge gains in recent years but often falls hard on bad news. While the stock is up 450 percent in five years, it has pulled back nearly 10 percent in the last three months. Is this an opportunity for a company that provides enterprise cloud computing solutions to various businesses and industries worldwide? It does more than this.

It also offers social and mobile cloud apps and platform services, including Sales Cloud for sales force automation, which enables companies to grow their sales pipelines, close deals, improve sales productivity, and gain business insights. It offers Service Cloud, which enables companies to connect with their customers and address their service and support needs, as well as Marketing Cloud, which enables companies to bring in data from any source and deliver personalized interactions to any customer across any channel through email, mobile, social, Web, marketing automation, and data analytics from a single platform.

It also sells the Salesforce1 Platform, a cloud platform for developing customer apps. It provides professional services, including consulting, deployment, training, implementation, integration, and campaign services to its customers to facilitate the adoption of its social and mobile cloud solutions. To understand if the stock is a buy moving forward, an analysis of the company’s most recent earnings is warranted.

In its most recent quarter, total revenue was $1.23 billion, an increase of 37 percent year over year. Subscription and support revenues were $1.15 billion, an increase of 36 percent year over year. Professional services and other revenues were $79 million, an increase of 58 percent year over year. However, the company does lose money on a GAAP basis. Diluted GAAP loss per share was 16 cents, and diluted non-GAAP earnings per share was 11 cents.

The company’s non-GAAP results exclude the effects of $131 million in stock-based compensation expense, $44 million in amortization of purchased intangibles, $11 million in net non-cash interest expense related to the company’s convertible senior notes, and $9 million related to the loss on conversions of its convertible 0.75 percent senior notes, due 2015, and is based on a projected long-term non-GAAP tax rate of 36.5 percent. Cash generated from operations for the fiscal first quarter was $473 million, an increase of 67 percent year over year. Total cash, cash equivalents, and marketable securities finished the quarter at $1.53 billion.

While the quarterly growth is impressive, where is the stock going? This is where we turn to guidance. Revenue for the company’s second fiscal quarter is projected to be in the range of $1.285 billion to $1.29 billion, an increase of 34 percent to 35 percent year-over-year. That is impressive, although GAAP loss per share is expected to be in the range of 13 cents to 12 cents, while diluted non-GAAP earnings per share is expected to be in the range of 11 cents to 12 cents.

The stock is in a tough spot right here. While revenue is growing at healthy clip and the company is losing less money on a GAAP basis than in the past, I think the stock is tough to value. It is a momentum name. Do I see the momentum continuing? Yes, I do. Because the stock continues to move ever higher each year, the company needs to keep delivering. Turning to the entire fiscal 2015, the company has raised guidance. Revenue for the company’s full fiscal year 2015 is projected to be in the range of $5.3 billion to $5.34 billion, an increase of 30 percent to 31 percent year over year.

GAAP loss per share is expected to be in the range of 49 cents to 47 cents while diluted non-GAAP earnings are expected to be in the range of 49 cents to 51 cents. Given the continued momentum and the pullback in the stock, I think it is a buy going forward.

Disclosure: Christopher F. Davis holds no position in Salesforce.com Inc. and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $64 price target.

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